Evaluating Internal Control

Question 1

Identify three inherent limitations of internal controls.

Answer 1

1. )Cost of controls should not exceed expected benefits.
2. )Mistakes may occur due to carelessness, fatigue, misjudgments, and so on.
3. )Segregation of duties may break down due to collusion or management override of internal controls.

Question 2

Identify two reasons for assessing control risk at the maximum level.

Answer 2

1. )The auditor believes that the design of internal control is ineffective.
2. )The auditor believes that reliance on internal control (and performing applicable tests of control) is not an efficient audit strategy compared to a wholly substantive audit approach.

Question 3

When should the auditor assess the design effectiveness of internal control?

Answer 3

In planning every audit under generally accepted accounting standards (GAAS), as a basis for determining the nature, timing, and extent of further audit procedures

Question 4

When should the auditor assess the operating effectiveness of internal control?

Answer 4

Whenever the auditor contemplates a reliance strategy (which means the same thing as “assessing control risk at less than the maximum level”) and only after performing the appropriate tests of control